Area Contract: Net Cost
When an authority issues a contract to a bus operator giving him the exclusive right to operate bus services in an area that forms all or a substantial part of a city, it’s described as an area contract.

Normally these contracts are awarded on the basis of competitive tenders. During a transition period, however, negotiated area-contracts may be awarded on the basis of negotiation with an incumbent bus operator.

Under a net-cost contract the operator provides a specified service for a specified period and retains all revenue. The authority pays a subsidy to the operator if the bus services in an area are unprofitable. If the services are profitable, the authority pays the operator a royalty. Under a net-cost contract the operator has to forecast both his costs and his revenues.

An area contract will be appropriate if:

• The city has a number of relatively self-contained areas. (If the total number of buses in the city is fewer than 500 then there should be only one citywide area.)
• The authority wishes the operator to undertake bus service planning for the area (normally this would be subject to approval by the authority).
• The authority wishes the operator to establish himself and be identified as the bus system provider for the area.

• The authority wishes to give an incentive to the operator to increase ridership and revenue.
• The authority wishes to give the operator some flexibility to amend routes and schedules to make the network as attractive and efficient as possible.
• A small percentage of revenue is collected off-bus.
• Sharing off-bus revenue is not seen as a problem.
• The authority wishes to fix the absolute amount of subsidy.

• There is a possibility of encouraging on-street competition for passengers on streets where more than one company operates.
• Sometimes it’s difficult to decide which operator should operate routes that cross two or more areas.
• The authority may have to pay more for a net-cost rather than a gross-cost contract since the operator usually makes very conservative estimates of revenue to reduce his financial risk
• The authority’s ability to make essential changess to the network are restricted if they adversely affect the revenue of pre-existing net-cost contracts.
• Since the number of buses involved is relatively large, the number of bidders is likely to be small.
• It’s difficult to replace a poorly performing operator since a large fleet of buses is involved.

System design for a net-cost area contract must take into account:
Legal and regulatory framework
Institutional requirements
Financial aspects
Fares
Vehicle types
Infrastructure requirements
Making the transition